UK retailer Boots has acknowledged that while it has a conflict of interest regarding contributions to its £2.8bn (e4.2bn) pension scheme it rejects concerns the decision to switch out of bonds was made too lightly.
Boots Pensions confirmed in a recent letter to scheme members from John Watson, chairman of the trustees, that it planned to allocate money to non-bond asset classes, which might include equities and bonds.
Watson in the letter said: “Our investment strategy will be to continue to match assets to liabilities as closely as possible. In order to do this we believe a portfolio largely made up of bonds will continue to be the best match. However, there are practical limits to what can be achieved, particularly for long-dated liabilities. There are virtually no bonds issued with a maturity beyond 35 years.”
He said, therefore, the fund intended to invest in other asset classes, which, in its annual accounts, might be up to 15%, a move supported by the company. Boots Pensions’ investment adviser is Hewitt Bacon & Woodrow, which also advises the scheme sponsor. The original decision to move out of equities and 100% into bonds in 2001 was made with a second, independent consultation with Mercer Investment Consulting, but it has not been consulted for the latest plan.
Jon Exley, senior consultant at Mercers, who provided Boots Pensions with the confirmation that moving into bonds was the right course of action in 2001, said: “Boots did not take advice from us this_time. Our advice would be the same as it was in 2000/2001: to be 100% in bonds. Bonds do not 100% match liabilities but they have the least risk. Moving into equities and property does not address these matching_issues either but increases_risks.”
Boots Plc as sponsoring company has faced rising contribution costs as a result of moving into bonds. Boots in May said the cost is expected to increase by £40m in 2004/05. “This is principally as a result of the roll-off of the amortisation of previous surpluses, and the movement in real bond yields downwards in the three years since the last actuarial valuation.”
Boots’ spokesman said the trustees had approached the company first about the planned switch. He added: “We have a conflict of interest as we are contributors but the trustees would not have made the decision lightly.” The trustees would not comment to the press.
John Ralfe, Boots’ former head of corporate finance who led the shift to bonds, in May said: “The trustee decision has increased risk for the 70,000 scheme members that their pensions will not be paid. Where is the expected extra return for members to compensate for this higher risk?"
He added : “The decision to move out of bonds may or may not reduce contributions but that is no reason to increase risks. The original decision was made with checks and balances and I rather get the impression it has been casually dealt with at this stage.”
Hewitt’s spokesman declined to comment because of client confidentiality but said if there was a particular issue with a conflict, such as scheme mergers, it encouraged clients to get separate advice. He could not say whether the actuarial profession, which published its advice on best practice in handling conflicts of interest this year, recommendations had been followed to the letter but that none of its advice would have been compromised by any conflict of interest.